Blindsided by the pandemic, forward-thinking CFOs strapped on the corporate equivalent of a Fitbit, monitoring and comparing traditional business indicators along with atypical data presenting a possibly clearer picture of future business performance.
For the most part, this data resided outside the finance organization in different functions like operations, HR and marketing for their own performance analyses. The extreme uncertainties imposed by the pandemic required veteran CFOs like Ken Stillwell to capture the nonfinancial KPIs (key performance indicators) to interpret which way the economic winds were blowing.
“There were metrics in our business that finance didn’t pay as much attention to before Covid-19 that we now pay quite a bit of attention to,” said Stillwell, CFO at Pega, a publicly traded software company. “In general, KPIs have helped us over the past year to avoid a lot of negative repercussions.”
Pega has transitioned over the past four years from a seller of on-premises business process outsourcing and customer relationship software products into a cloud-based SaaS (Software-as-a-Service) provider of these technology tools. The transformation helped it increase revenues during the difficult past year, as customers pay monthly subscription fees offering relatively reliable recurring revenues. Nevertheless, the chief risk was that customers might have difficulty paying the monthly subscriptions.
To get in front of this possibility, Stillwell analyzed near-real time metrics like delayed subscription renewals, pipeline aging, customer satisfaction and DSO (days sales outstanding), a measurement of the average number of days it takes for a company to collect monies owed it. “I was most interested in learning where customers were delaying their payments to be in a position to possibly renegotiate the deal terms,” he said.
Ultimately, the DSO metric revealed that more than 10 percent of customers had delayed paying their fees. “I reached out and asked if everything was okay,” he said. “Most said they wanted to continue buying our product but didn’t think they could pay us for at least six months. We had the opportunity to work out an arrangement we might otherwise not have had.”
Other CFOs are pulling together atypical metrics for finance to gain a better sense of business potentialities. “We’re posting customer metrics on the finance dashboard like NPS (net promoter score), on-time delivery and payment lapses, alongside more traditional financial metrics, where I’m able to see them and drill down into the granular details,” said Mike Speetzen, CFO at Polaris, a publicly traded manufacturer of motorcycles, snowmobiles, boats and ATVs (all-terrain vehicles).
On the radar screens of CFOs in other industries are KPIs like employee engagement, brand loyalty, pipeline throughput and a variety of different ESG (environmental, social and governance) figures that when compared and contrasted provide a more detailed and reliable picture of business conditions.
“The pandemic forced the finance function to hunt for indicators of business performance beyond the metrics typically used and reported,” said Michael Heric, a partner in the performance improvement practice at Bain & Company. “To do this requires the use of KPIs that haven’t typically been the purview of the CFO.”
Lagging and Leading
Generally, there are two types of KPIs—financial and non-financial. The former is composed of quantifiable financial metrics like revenues, net profit, liquidity and cash availability, among others. Non-financial KPIs include more subjective factors like store foot traffic, customer satisfaction, and employee engagement, each one yielding insights on what’s happening beneath the surface of the purely financial KPIs.
Such metrics generally were developed within business units, departments, divisions and functions to serve their own performance analyses. The numbing uncertainty surrounding demand produced by the pandemic is prompting many CFOs to collect and monitor these KPIs to assess overall enterprise performance.
Prescriptive analytics is not elusive, nor is a prescriptive platform difficult to deploy when you have the right tools in place. A guide.
An example is the use of customer payment metrics. “Key areas of focus for many CFOs during the pandemic were liquidity and working capital, which required them to go deeper into things adversely affecting them—like payments,” said Heric. “Companies that previously adopted digital payment solutions to send invoices and get paid electronically had access to useful real time data. By turning this data into a metric, their CFOs had greater control over cash outlays and the management of working capital.”
Alternatively, finance organizations with such tools had less insight into how much capital they had and needed to keep business humming. Tim Koller, a McKinsey & Company partner leading the firm’s strategy and corporate finance practice, said that CFOs capable of integrating traditional financial metrics and non-financial KPIs have a “better clue of what is happening right now. In a crisis situation when critical decisions are needed, CFOs need as much information as they can get.”
The challenge is which tea leaves are the better predictors of performance. CFOs must be “judicious and thoughtful,” said Koller, about the non-financial metrics they opt to measure in the balanced scorecard to drive better business outcomes.
“It’s useful to break up the business into logical segments like divisions, business units, products, geographic markets and so on, with specific KPIs used to discern in each segment,” he said. “The goal is to determine the most important things that matter to each segment’s performance, collect the granular data informing these things, and find a way to turn this data into a metric you can follow.”
Clarifying the Crystal Ball
This process is especially important with newer metrics like ESG (environment, social, governance), a key legislative and regulatory focus of the Biden Administration. A case in point is forced labor. As manufacturers grapple with pandemic-induced supply chain disruptions, they need to ensure a fourth or fifth tier supplier isn’t sourcing from a supplier employing workers against their will to make their products.
The challenge is determining which supplier in a vast matrix of suppliers across the far-flung globe may be relying on forced labor. While OEMs (original equipment manufacturers) can map their supply chains, regularly validating the labor practices of hundreds of suppliers would be prohibitively expensive. But Koller said, “There are actually ways to turn this into a metric.”
He provided the example of requiring the top two or three tiers of suppliers to conduct routine audits of their suppliers to assure proper working conditions. “If a supplier’s audit volume diminishes over a specified time duration—from auditing 25 suppliers one year to 15 the next—it suggests a potentially higher ESG risk,” he explained. “You’d be amazed at the many ways in which all sorts of data can be turned into a KPI.”
These different ways have been put into action at managed home healthcare manager CareCentrix. “During the pandemic, we created a KPI that compared nurse coach productivity in a telemedicine setting to our traditional nurse efficiency and effectiveness measure serving patients at their homes,” said CFO Steven Horowitz. “We wanted to get a sense of early warning signals where nurses working at home to assist a patient may be less engaged in their work because of higher stress levels.”
The new metric was based on patient satisfaction surveys and system-generated data, such as how long a nurse coach spent in telemedicine conferrals with each patient. The findings were surprising. “We discovered a lot more disparity between the effectiveness of our nurses assisting patients in their homes, due to stress over Covid-19 infection,” Horowitz said. “Some were handling the situation really well, using what we consider best practices, whereas others were struggling. Having this visibility guided us to put forth actions like training or encouraging they take more flex time or time off to disconnect and recharge.”
Other CFOs are paying more attention to KPIs that received scant consideration in the past. Among them is Scott Settersten, CFO at cosmetics, fragrances and skin care products retailer Ulta Beauty, which closed more than 1,250 stores in March 2020. All the brick-and-mortar stores have since reopened and Settersten is presently tracking the return rate of customers to determine omnichannel spend considerations.
“Our digital platform handling ecommerce, direct home deliveries and curbside and store pick-up certainly helped offset the weakness in our store fleet,” he said. “But as an omnichannel retailer, we wanted to track the number of return shoppers to understand how everything is counterbalancing.”
In addition to tracking and comparing the sales metrics in each of Ulta Beauty’s shopping channels, Settersten is assessing how customers are engaging with its stores through the lens of its highly successful loyalty program, Ultamate Rewards, which tallies more than 32 million members. “As we open new stores in 2021, we’re monitoring metrics on both new and reactivated loyalty members to see how frequently they are going to our physical stores and comparing the data against their other omnichannel shopping patterns,” he said.
While many retail consultants believe there will be some permanent reduction in aggregate retail footprints going forward, Ulta Beauty is a possible outlier, as its stores offer inviting customer experiences like product demos and hair and skin services. “As people get back into the swing of things, we expect them to return to pre-pandemic in-store shopping levels, but we’re measuring it against our other channels to determine the equilibrium, which may be different,” Settersten said.
Speetzen also is wants to get a better understanding of customer sales trends at Polaris. The company has long relied on NPS to calculate the inclinations of buyers to recommend its products, a good sign of customer satisfaction. “During the pandemic, we were watching NPS intently, as we were concerned about late deliveries impacting customer satisfaction and loyalty,” he said.
Some vehicles could not be fully assembled at its plants in time to meet planned delivery timetables due to delays in the shipment of a particular component, such as shock absorbers. To get in front of the issue, Speetzen tracked an on-time supplier delivery KPI.
“When it looked like a delivery was going to come in later than planned, we told the supplier to send the product to our distribution centers or dealer outlets for immediate installation, instead of to the plant, to reduce overall transportation times,” Speetzen said. “By combining the NPS and on-time delivery metrics, we were able to preempt possible customer impacts.”
Pega confronted a different set of revenue risks. Like all SaaS businesses, subscription rates are feedstock of revenue. To ensure they remained robust, Stillwell relies on a KPI that monitors delayed subscription renewals across different industry sectors. Two sectors—insurance and manufacturing—were atypically late in renewing. Stillwell wanted to find out why.
“We reached out to these customers and discovered the reason was the remote working environment,” he said. “Business-as-usual accounts payables and receivables activities had gummed up because of the pandemic’s disruption on traditional office work. … It had nothing to do with the quality of our products or services.”
Another metric gauged pipeline throughput. “Several subscription deals in the works prior to the pandemic had fallen by the wayside, for obvious reasons,” Stillwell explained. “In such cases, we reached out to the prospective customers to restructure the deals, allowing payment delays until they had more certainty about their financial situations.”
All the CFOs have built dashboards displaying their companies’ financial and nonfinancial performance metrics to alert up-and-down trending, with the granular details generating these movements underneath. The KPIs are rolled up to support the reported financial figures—how well their assets are being employed to generate revenues and a profit.
Heric from Bain said CFOs searching for answers “can find them by looking beyond what’s in front of them.” To do this, finance must the nexus of numbers—”not just the traditional financial metrics but every KPI used throughout the business to assess performance. It all needs to be in one place,” he said.
In their strategic role, the CFO must become the master of all metrics. “CFOs are increasingly expected to identify the most important operational, financial and talent metrics, collaborating with functional leaders to achieve a unified view, with finance becoming a single pane of glass to better see and understand end-to-end performance,” Heric said. “No other person in the C-suite is better positioned for the task.”